Canada Monetary Policy January 2016

Canada: Bank of Canada maintains policy stance in January

January 20, 2016

At its first monetary policy meeting of the year, the Bank of Canada (BoC) decided to maintain the target for the overnight rate at 0.50%. The decision was in line with the market’s expectations, however, there were a number of analysts who had expected the bank to lower policy rates further in an effort to provide more help to the struggling economy. Several factors, including the likelihood of fiscal stimulus, the devaluation of the Canadian dollar since October and inflationary pressures, contributed to the Bank’s decision.

In its accompanying statement, the BoC noted that inflation had been evolving in line with expectations since its last meeting. The Bank also stated that inflation over the course of 2015, particularly during the first three quarters, had undershot expectations, as gasoline prices did not experience a fall commensurate with crude prices and the dollar underwent a more striking devaluation than expected. The weak Canadian dollar has pulled up prices for imported products and manufactured goods with imported components, while other goods and services have had to contend with downward pressures on prices stemming from the slack in the economy.

The theme for the BoC’s global economic analysis was the country’s divergent economic prospects, exemplified by the Fed’s tightening cycle that contrasts an accommodative policy stance by other major central banks. Growth in the U.S. is being bolstered by strong economic fundamentals, and prospects for employment and wages are continuing to improve. On the other hand, China is currently transitioning to a more market-oriented stable growth path and the process is causing volatility in markets.

At home, weak commodity prices have widened the output gap in the Canadian economy and a transitory soft patch in the U.S. economy in Q4 2015 likely had an impact on Canadian exporters. The economy is undergoing a rebalancing in which non-resource activities are making up a larger share of GDP. Such a transition will be supported by a weak dollar and accommodative policy conditions. Meanwhile, the labor market is proving resilient in spite of job losses in the resource sector.

The BoC stated that the offsetting factors have resulted in balanced risks to inflation. However, the BoC noted that it had, “not yet incorporated the positive impact of fiscal measures expected in the next federal budget,” and therefore decided that the current policy stance was appropriate. The next policy meeting is scheduled for 9 March.

Met the why particular Consensus Forecast panelists see the policy rate at 0.72% at the end of 2016. For 2017, panelists expect the policy rate to rise to 1.37%.

The Ivey Purchasing Managers Index (PMI), prepared by the Richard Ivey School of Business, declined a seasonally-adjusted 2.6 points from November to 60.4 in December—coming in below the 62.2-point reading that market analysts had expected.